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Blue Company offers an MP3 download (seven-single medley) as a premium for every 6 candy bar wrappers presented by customers together with $2.85. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each download code to the company is $2.60. In addition, it costs 50 cents to distribute each code. The results of the premium plan for the years 2017 and 2018 are as follows. (All purchases and sales are for cash.) 2017 2018 MP3 codes purchased Candy bars sold Wrappers redeemed 2017 wrappers expected to be redeemed in 2018 2018 wrappers expected to be redeemed in 2019 300,000 396,000 3,180,800 2,948,900 1,440,000 1,800,000 348,000 420,000 Prepare the journal entries that should be made in 2017 and 2018 to record the transactions related to the premium plan of the Blue Company. (I no entry is required, select “No Entry” for the account titles and enter O for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually, Round answers to 0 decimal places,e.g. 1,525)
Expert Answer
Solution
Premium expense for 2017:
Mp3(1440000/6)=240,000
Cost to purchase codes(240000× $2.60)=$624,000
Distribution cost(240000×.50=$120,000
Total cost=$744,000
Less cash received(240000×$2.85)=(684,000)
Premium expense=$60,000
| Account titles and explanation | Debit | Credit | |
| 2017 | Inventory of premium(300,000×$2.60) | $780,000 | |
| Cash | $780,000 | ||
| (To record the premium inventory) | |||
| Cash(3180,800×$.30) | $954,240 | ||
| Sales revenue | $954,240 | ||
| (To record the sales) | |||
| Cash(684,000-120,000( | $564,000 | ||
| Premium expense | $60,000 | ||
| Inventory of premium | $624,000 | ||
| (To record the expense associated with sale) | |||
| Premium expense(348000/6)×(2.60+.50-2.85) | $14,500 | ||
| Premium liability | $14,500 | ||
| (To record the premium liability) | |||
| Account titles and explanation | Debit | Credit | |
| 2018 | Inventory of premium(396,000×$2.60) | $1,029,600 | |
| Cash | $1,029,600 | ||
| (To record the premium inventory) | |||
| Cash(2,948,900×$.30) | $884,670 | ||
| Sales revenue | $884,670 | ||
| (To record the sales) | |||
| Cash(855,000-150,000) | $705,000 | ||
| Premium expense | $75,000 | ||
| Premium Liability | $14,500 | ||
| Inventory of premium | $794,500 | ||
| (To record the expense associated with sale) | |||
| Premium expense (420000/6)×(2.60+.50-2.85) | $17,500 | ||
| Premium liability | $17,500 | ||
| (To record the premium liability) | |||
Premium expense for 2018:
Mp3(1,800,000/6)=300,000
Cost to purchase codes(300000× $2.60)=$780,000
Distribution cost(300000×.50=$150,000
Total cost=$930,000
Less cash received(300000×$2.85)=(855,000)
Premium expense=$75,000
